China Unveils Rail Ministry Breakup to Curb Corruption

By Jasmine Wang -
Mar 11, 2013

China will dismantle its rail
ministry as the nation’s new leaders pare bureaucracy and battle
graft in a department that has more than 2 million employees and
a debt load larger than Denmark’s economy.

The Ministry of Railways will be split into two, according
to a report to the National People’s Congress yesterday. Some
functions will be put into a State Railway Administration under
the Ministry of Transportation. A new company, China Railway
Corp., will take over commercial operations, according to the
plan.

The break-up of the railway ministry, burdened with 2.66
trillion yuan ($428 billion) of liabilities, follows the firing
of the former rail minister in 2011 amid allegations of
corruption and a high-speed train crash that killed 40 people
later that year. It forms part of a broader government revamp as
incoming leaders Xi Jinping and Li Keqiang face pressure to
deliver on pledges to rein in graft.

“As the last major monopoly in China, the rail ministry
never lacked corruption, bureaucracy and mismanagement,” said
Chen Yao, an associate professor at Shanghai Jiao Tong
University, who has published four books on Chinese government
organizations and public policy. “The new leadership is sending
a clear message that they are taking real actions and are
serious about building a cleaner and more efficient
government.”

Corruption Charges

The revamp won’t affect investment in railways and will
help the industry to better meet market demand, Rail Minister
Sheng Guangzu told reporters at the NPC yesterday. Wen’s report
didn’t say what would happen to the position of rail minister.
The ministry is China’s biggest issuer of corporate notes.

Sheng was appointed in 2011 after predecessor Liu Zhijun
was ousted following allegations of corruption. Liu, who was
later expelled from the Communist Party, was among the highest-
ranked Chinese officials to face corruption-related charges
until the downfall of Politburo member Bo Xilai.

Liu, who championed what he called “leapfrog development”
of rail construction, was one of the officials held responsible
for the high-speed train crash in 2011 that was one of the
deadliest rail accidents in China. Mismanagement and design
flaws were the main causes of the crash near the eastern Chinese
city of Wenzhou, according to a government investigation.

Reform Prelude

The separation of the ministry’s regulatory and operating
roles will bring the railways into line with other parts of
China’s state-run economy, including aviation,
telecommunications and energy.

“Railway was the only ministry that didn’t separate
administration from management,” Zhao Jian, a professor of
economics at Beijing Jiaotong University, said in a telephone
interview yesterday. “The breakup is a very significant step as
a prelude to reform.”

The railway administration will be in charge of
establishing technology standards, supervising work safety, and
overseeing service and project quality, according to yesterday’s
report, which will be reviewed by the legislature. Planning and
policy functions will be directly given to the transportation
ministry and won’t be part of the new body, it said.

China Railway Corp. will be responsible for railway
transportation dispatch and command, freight and passenger
transportation business management and railway construction, the
report said.

Railway Investment

“The state will continue to support railway construction
and development, will accelerate railway investment and reform
of the fundraising system and pricing,” said State Councilor Ma Kai, who read the report to the NPC yesterday.

Publicly traded railway companies such as the nation’s two
biggest rail builders -- China Railway Group Ltd. (601390) and China
Railway Construction Corp. -- as well as train maker CSR Corp.,
are likely to benefit from reduced bureaucracy, improved
transparency, tariff hikes at the newly established China
Railway Corp., Barclays Plc analysts led by Patrick Xu said in a
note to clients yesterday.

“We view the reform positively,” the analysts said. “We
expect it will be easier for China Railway Corp. to restructure
its assets and debt as an incorporated company than the Ministry
of Railways, providing increased flexibility to the funding of
railway projects.”

Market Pricing

The reform may pave way for more flexible, market-driven
pricing and assets consolidation, benefiting the two main listed
rail operators Daqin Railway Co. and Guangshen Railway Co.,
Goldman Sachs Group Inc. analysts led by Ronald Keung said in a
note today.

China Railway climbed 0.7 percent to close at 3.07 yuan in
Shanghai and China Railway Construction dropped 0.2 percent. CSR
Corp was up 0.9 percent to close at 4.75 yuan.

Bonds

The rail ministry sold a record 164 billion yuan of bonds
last year, helping it settle unpaid bills with train and track
makers as the government boosted investment to spur GDP growth.
China’s rail network is set to reach 120,000 kilometers (74,600
miles) under the five-year plan ending in 2015.

Borrowing costs for the ministry have fallen recently,
hitting a seven-month low at end of February, amid speculation
that the authority would be merged with the transportation
ministry.

The government will study the existing debt and deal with
it “seriously and appropriately,” Sheng told reporters in
Beijing yesterday. The debt may be categorized by whether it
involves railways for public use or commercial use, he said.

China may also award an order for bullet trains this month
or next as the orders originally scheduled by the end of last
year were withheld temporarily because of the leadership
transition and the reform, Karen Li, an analyst with JPMorgan
Chase & Co. said in a note yesterday.

“The change will improve transparency and raise the
quality of fundraising,” Jia Kang, director of the finance
ministry’s fiscal-science research institute, said in Beijing
yesterday.

China has the world’s biggest high-speed rail network after
opening a bullet train line linking two of its biggest cities,
Beijing and Shanghai, and another linking the capital with
Guangzhou, the capital of southern Guangdong province. Sheng
said in January that the railways aim to spend 650 billion yuan
on rail-related fixed-asset investment this year.

The rail ministry was already downsized in previous rounds
of government restructuring, with hundreds of schools and
hospitals it controlled being handed over to local governments.